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My Bet: We Bounce

Today’s ADP Report (this is the other employment report) showed growth of just 40K jobs for December.

I expect the BLS employment situation (out tomorrow morning) to also show weak growth, but my hunch is it is much higher, around 100K.

If the employment situation is not unequivocally disasterous, I think the markets bounce, or at the very least, stabilize.

I say this because an indicator I’m testing just hit the most extreme level of short-term oversold for as far back as I’ve tested (through August of 2007.) It is still in development, so take it for what its worth.

Should the indexes fall hard tomorrow, there is the possibility of a test of November lows.

I’m having a hard time selecting charts tonight as everything that is weak is too oversold to short, and everything that is strong is at a perfect buy-the-dip point. Something does not feel right about any of it.

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A Hot Bioenergy Chart


Pacific Ethanol has been screaming higher, likely in sympathy with the Verasun Energy [[VSE]] and U.S. Bioenergy [[USBE]] merger announcement. After the close today, the FTC waiting period was ended early.

As of December 11th, 20% of [[PEIX]] float was sold short.

Based on the chart pattern and the volume coming into this stock, I believe it goes higher. Should I take a position, I will look to exit near the declining 200 day moving average.

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Tomorrow’s Action Will Be Key

The thud that resounded this afternoon was the sound of thousands of bull balls falling off and smacking the ground. Remember, the bulls were banded a couple of weeks ago.

I’m a bear and have been a bear since October. However, stocks seldom move in one direction for very long. Based on RSI(2) readings on the Nasdaq and SPY (both are at ~4.00), it seems probable that there will be several days of stabilization ahead, or even a short bounce. Today was the fourth down day in a row.

 The screens I ran tonight found many, many stocks in uptrends that have recently pulled back to support or a major moving average. The RSI(2) screen usually returns a couple of stocks a week that meet my criteria. Tonight, there were at least 7 stocks in strong uptrends but were oversold. This means there are likely many stocks at points where one would “buy the dip.”

SPY 2007: What A Mess!

The wildcard is that the last 10 or so trading days have been executed on lower volume and without all the participants necessary to make the market. An important observation is that the indexes began trading today at levels near where they were when many traders began taking off for the holidays. Odd, no?

Because the technicals have been skewed by lack of participation, it is difficult to make a confident call about this week. Everyone knows the S&P has been weak and the Nasdaq strong. What should concern the bulls is that the Nasdaq is sitting just above support. It is the last stronghold of the 5 year bull rally. If it cannot rally or stabilize immediately, that support will likely fail. Should this happen, we will switch from looking for a tradable bounce to instead looking at the resumption of a steeper downtrend and waiting for capitulation, as market breadth is no where near any levels where we might expect a sustainable bottom. In the near term, my feelings are that the bulls will not give up so easily and will work to defend this support, likely tomorrow.

All that being said, there are also some very real phenomena that happen in January, with traders positioning themselves for the first half of the year. With this comes selling of 2007 winners so that taxes are deferred into 2009. Also, there is no need to window dress anything, and investors will not be looking to see what there funds are holding for another 3 months.

Tomorrow’s action will be key, and with that clarity, hopefully I will be able to bring you some words of wisdom and some tradeable ideas.

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RSI(2) Oversold Play: CHD

RSI(2) Oversold Play: CHD

Church & Dwight broke out of a long base in November, surging over 10 points. This maker of Trojan Condoms has now pulled back to less than 2 points above its 50 day moving average and is resting just above its 38.2% Fibonacci retracement. Also, [[CHD]] is approaching support generated from the May high. The convergence of 3 technicals with a stock that is severly oversold is likely to offer protection (pun intended) from more near-term downside and creates conditions which make a bounce likely.

You can read previous RSI(2)<2 picks here: Archive for RSI(2) Oversold Play.

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Woodshedder’s Year In Review and Trading Plan for 2008

For 2007, my account finished -3%. Twice in the year I was up as much as 20%, and once I was down over 10%.  After 3 straight years of double-digit returns, this sub-par performance is certainly disappointing. However, I have a clear understanding of what went wrong and am confident that 2008 will be much more successful.

In hindsight, my trading suffered from the following:

  • Over-trading
  • Incorrect position-sizing
  • Failure to follow a clearly defined strategy
  • Over-reliance on purely discretionary trades
  • Continuing to trade during stressful and intense life events
  • Becoming married to a stock

It is important to note that most of these problems are linked together. For example, after having a new baby, moving into a new home, and getting a promotion that required more responsibilities at work, I had much less time to research and focus on trading. This led to me taking discretionary trades which I had researched very little, and consequently, I had very little conviction in these trades. Lack of conviction led to me overtrading, taking many, many small losses, and often selling too soon before a big move.

When I did develop some convictions about a trade, I often established a position that was too large. In these successful trades, I often focused on my juicy gains rather than the technicals (often I had no exit strategy) and then got punished by surprise downgrades or an earnings miss.

As for being married to a stock, [[MVIS]] should have been sold after the big announcement. That was my plan, and the announcement came on a day when I was out of the office with no access to the internet. Instead of selling it the next day, I held on. This really hurt my account over the rest of the year.

My Plan for 2008

I am going to focus on 6 strategies

1. I will allocate 20% of my capital to trading the RSI(2) strategy. I like this strategy as it forces me to buy weakness. 

2. I will allocate 15% of my capital to buying stocks that have broken out and then pulled back.

3. I will allocate 15% of my capital to buying leading stocks that have pulled back to a major moving average, i.e., 20 or 50 day simple moving average. 

4. I will allocate 20% of my capital to shorting stocks that have broken down and have failed to overtake the 50 and/or 200 day moving average.

5. I will allocate 15% of my capital to buying stocks that have just broken out and are sill within buying range or stocks that are making new 52-week highs. I will also use this portion to buy stocks because I want to own them, even if they do not meet any technical criteria. This will be my most discretionary allotment of capital.

6. I will allocate 15% of my capital to a market-neutral strategy still in development.

  • I will limit each position to ~6% of the total account value.
  • I will not make intraday trades unless they were researched prior to that day
  • I will not daytrade at work.
  • I will continue to develop exit rules for each strategy.
  • I will continue to journal each trade based on the strategy it resides within.

Finally, I will continue to use a gauge of market strength or weakness to determine weightings. For example, if the market technicals are bullish, I will likely deploy 90-100% of my capital, assuming there are enough stocks meeitng the above criteria. When the market is weak, I will likely forgo any new trades and let the account move towards cash or increase the capital allotment for the short strategy. Currently this gauge of market strength is somewhat discretionary but may become more quantifiable as it develops.

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End of Year Contest: We Have 2 Winners–Van and Nullpointer

Van pegged the close of the Nasdaq with his guess of 2652, while Nullpointer was less than 2 points shy of the actual SPX close with his guess of 1470.

 Congratulations to both Van and Nullpointer.

Email me woodshedder_blogspot at yahoo.com and I will ship out your prize booty.

Check out the entries here to see the winners based on their guesses: Contest Entries.

Happy New Year to All!!!

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The Daily Breakdown Update: GES

Since my last post on Guess, GES Revisited,  the stock has continued to decline and is now circling the drain. Buyers or short covering must happen soon or the stock will break a 10-month line of support.

RSI(2) and Stochastics are near oversold, so a bounce may be in the works. However, I have a gut feeling that [[GES]] will break support and go lower before bouncing, but I would not bet the farm on that hunch.

Keep in mind the company beat and raised estimates during its last earnings release. I feel strongly that value investors will step in at some point and provide some support, but it is hard to predict when GES might start hitting value screens. On Thursday, GES did put in a bullish hammer on good volume, so it may be that value is already establishing a position.

Overall, this leader and strong retail/clothing company selling off the way it has does not bode well for the economy or for consumerism.

Until the downtrend line is busted, this remains a great short.

GES 12/30/07

Full Disclosure: I’m short GES.

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